Bank of Yokohama Reviews JGB Investments on Abe Yield Risk

Bank of Yokohama Ltd. said it’s reviewing its investment plan for Japanese government bonds as Prime Minister Shinzo Abe’s reflationary policies could erode the value of its holdings.

Japan’s second-largest regional lender by market value cut its 871 billion yen ($8.8 billion) of sovereign bond assets by about 100 billion yen in early April, when the central bank unveiled a stimulus plan aimed at stoking inflation, President Tatsumaro Terazawa, 66, said in an interview on June 25.

The Bank of Japan’s plan to double government bond purchases has roiled the market, increasing yields and fueling concern that lenders may incur losses on their holdings. That firmed Yokohama Bank’s resolve to diversify assets away from the notes into securities such as foreign bonds, Terazawa said.

“We sold all Japanese government notes with a maturity of longer than five years to hedge against risks,” he said. “The policy shift completely changed our plan that we would lengthen the duration of our JGB holdings to boost interest income.”

Terazawa is a former director-general at the Finance Ministry’s financial bureau, which manages the country’s bonds. He said he will monitor the market closely and amend the bank’s bond investment plan, without giving a time frame.

The lender will expand investments into foreign notes, domestic equity mutual funds and real-estate investment trusts to about 450 billion yen in the year ending March 2016 from about 100 billion yen last fiscal year, it said in a business plan on April 1.

Shares Rise

Shares of the Yokohama-based bank climbed 6.2 percent, the most in almost three months, to 512 yen at the close in Tokyo, extending their advance this year to 28 percent. The benchmark Topix Index jumped 3.2 percent today after government reports showed consumer prices halted a six-month slide in May and industrial production rose the most since December 2011.

Yields on Japan’s benchmark 10-year notes swung between a record low of 0.315 percent on April 5, the day after the central bank announced its bond-buying plan, to as high as 1 percent in May. The securities yielded 0.83 percent at 10:17 a.m. in Tokyo.

In contrast with Yokohama Bank, other regional lenders continued to use their excess deposits to buy government bonds in April, even as yields surged. Local banks’ holdings of sovereign notes increased 1.9 percent that month to 43.8 trillion yen, Bank of Japan data show.

“We have a much higher loan-to-deposit ratio than other regional banks,” said Terazawa. “That means we’re different from banks that have no choice but to buy JGBs with their excess cash.”

Yokohama Bank’s loans amounted to 85 percent of deposits on March 31, according to the lender’s data. That compares with 69 percent for regional banks overall, BOJ figures show.

The BOJ released a report in April examining potential losses at banks from rising yields. If interest rates climb 1 percentage point across all maturities, for example, domestic lenders would incur 3.4 trillion yen of unrealized capital losses, the central bank said.